The European debt crisis (often also referred to as the Eurozone crisis or the European sovereign debt crisis) is a multi-year debt crisis that has been taking place in several eurozone member states since the end of 2009. These states (Greece, Portugal, Ireland, Spain, Cyprus) were unable to repay or refinance their government debt or to bail out over-indebted banks under their national supervision without the assistance of third parties like the EFSF, the ECB, or the IMF.
Greece was the first developed country to have missed a payment to the IMF in 2015, defaulting on its IMF debt after having received a debt cut in 2012 and various other support measures from 2010-2015. Although Greece's default had serious consequences for the country's international credit rating, it remains to be announced by official bodies such as IMF and European Leaders.
The European debt crisis erupted in the wake of the Great Recession around late 2009, and was characterized by an environment of overly high government structural deficits and accelerating debt levels. The states that were adversely affected by the crisis faced a strong rise in interest rate spreads for government bonds as a result of investor concerns about their future debt sustainability. Four eurozone states had to be rescued by sovereign bailout programs, which were provided jointly by the International Monetary Fund and the European Commission, with additional support at the technical level from the European Central Bank. Together these three international organisations representing the bailout creditors became nicknamed "the Troika".
In 1992, members of the European Union signed the Maastricht Treaty, under which they pledged to limit their deficit spending and debt levels. However, in the early 2000s, some EU member states were failing to stay within the confines of the Maastricht criteria and turned to securitising future government revenues to reduce their debts and/or deficits, sidestepping best practice and ignoring international standards. This allowed the sovereigns to mask their deficit and debt levels through a combination of techniques, including inconsistent accounting, off-balance-sheet transactions, and the use of complex currency and credit derivatives structures. From late 2009 on, after Greece's newly elected government stopped masking its true indebtedness and budget deficit, fears of sovereign defaults in certain European states developed in the public, and the government debt of several states was downgraded.
The detailed causes of the unsustainable budget deficits and debt levels varied. In several countries, private debts arising from a property bubble were transferred to sovereign debt as a result of banking system bailouts and government responses to slowing economies post-bubble. In Greece, the debt increase was associated with high public sector wage and pension commitments. The structure of the eurozone as a currency union (i.e., one currency) without fiscal union (e.g., different tax and public pension rules) contributed to the crisis and limited the ability of European leaders to respond. European banks own a significant amount of sovereign debt, such that concerns regarding the solvency of banking systems or sovereigns are negatively reinforcing. Concerns intensified in early 2010 and thereafter, leading European nations to implement a series of financial support measures such as the European Financial Stability Facility (EFSF) and European Stability Mechanism (ESM).
When, as a negative repercussion of the Great Recession, the relatively fragile banking sector had suffered large capital losses, most states in Europe had to bail out several of their most affected banks with some supporting recapitalization loans, because of the strong linkage between their survival and the financial stability of the economy. As of January 2009, a group of 10 central and eastern European banks had already asked for a bailout. At the time, the European Commission released a forecast of a 1.8% decline in EU economic output for 2009, making the outlook for the banks even worse. The many public funded bank recapitalizations were one reason behind the sharply deteriorated debt-to-GDP ratios experienced by several European governments in the wake of the Great Recession. The main root causes for the four sovereign debt crises erupting in Europe were reportedly a mix of: weak actual and potential growth; competitive weakness; liquidation of banks and sovereigns; large pre-existing debt-to-GDP ratios; and considerable liability stocks (government, private, and non-private sector).
During the course of 2010–12 it became evident that, out of eighteen eurozone states, four (Greece, Ireland, Portugal and Cyprus), facing persistent negative growth prospects and increasing government debt, would find it difficult or impossible to repay or refinance their government debt without the assistance of bailout support from the Troika. The transfers of bailout funds were performed in tranches over several years and were conditional on the governments simultaneously implementing a package of fiscal consolidation, structural reforms, privatization of public assets and setting up funds for further bank recapitalization and resolution. Spain was, strictly speaking, not hit by a sovereign debt-crisis in 2012, as the financial support package that they received from the European Stability Mechanism was earmarked for a bank recapitalization fund and did not include financial support for the government itself. As of July 2014, Ireland and Portugal had completed and exited their bailout programmes successfully, meaning that a combination of improved structural deficits and a return to economic growth had enabled them to regain full market access to accommodate their future refinancing needs. Greece and Cyprus both managed to partly regain market access in 2014, and were scheduled to have their bailout programme periods end in March 2016.
As well as the political measures and bailout programmes being implemented to combat the eurozone crisis, the European Central Bank (ECB) also contributed by lowering interest rates and providing cheap loans of more than one trillion euro in order to maintain money flows between European banks. On 6 September 2012, the ECB also calmed financial markets by announcing free unlimited support for all eurozone countries involved in a sovereign state bailout/precautionary programme from EFSF/ESM, through some yield lowering Outright Monetary Transactions (OMT).
The crisis had significant adverse economic effects and labour market effects for the worst affected countries, with unemployment rates in Greece and Spain reaching 27%, and was blamed for subdued economic growth, not only for the entire eurozone, but for the entire European Union. As such, it can be argued to have had a major political impact on the ruling governments in 8 out of 18 eurozone countries, contributing to power shifts in Greece, Ireland, Italy, Portugal, Spain, Slovenia, Slovakia, and the Netherlands.